Andy Sutton's Extemporania
Weekly Commentaries and Occasional Observations
Categories: Current Events
Another Bald-Face Lie About ‘Free Trade’ Deals
Editor’s Note: Funny, we heard the same thing back in the 1990s. Was going to create lots of jobs for Americans. We’re still waiting for all those jobs. Now this pack of establishment liars (yes, both sides) is selling more free trade deals with the promise of more new jobs. What an absolute and pathetic joke.
(AP:WASHINGTON) Congress was set to approve on Wednesday free trade agreements with South Korea, Colombia and Panama that have the potential to spur economic activity and put Americans back to work. President Barack Obama and Republicans said the expected action showed that they can cooperate to revive the struggling economy.
The deals are “an area of common ground where we have worked together,” said House Speaker John Boehner, R-Ohio.
The three House votes, to be followed by three in the Senate, were coming a day after Senate Republicans united to reject Obama’s jobs creation initiative. Despite the expected strong votes for the trade deals, political resentments lingered.
Republicans criticized Obama for taking several years to send the agreements, all signed in the George W. Bush administration, to Congress for final approval. Many among Obama’s core supporters, including organized labor and Democrats from areas hit hard by foreign competition, were unhappy that the White House was espousing the benefits of free trade.
Democratic opposition was particularly strong against the agreement with Colombia, where labor leaders long have faced the threat of violence.
“I find it deeply disturbing that the United States Congress is even considering a free trade agreement with a country that holds the world record for assassinations of trade unionists,” said Rep. Maxine Waters, D-Calif.
To address such dissatisfaction, the White House demanded linking the trade bills to extension of a Kennedy-era program that helps workers displaced by foreign competition with retraining and financial aid. The Senate went along; the House planned a vote Wednesday.
But with the focus in both the White House and Congress on jobs, the trade agreements enjoyed wide bipartisan support.
The administration says the three deals will boost U.S. exports by $13 billion a year and that just the agreement with South Korea, America’s seventh largest trading partner, will support 70,000 American jobs.
Groups that oppose the pacts, including the AFL-CIO, point to past cases where free trade agreements were linked to factories moving overseas and they dispute the job growth figures.
Supporters argue that the three trading partners already enjoy almost duty-free access to U.S. markets and the agreements will lower tariffs on U.S. goods, making them significantly more competitive.
The U.S. Chamber of Commerce notes that U.S. farm products sold to South Korea face 54 percent tariffs, compared with 9 percent for Korean agricultural goods in the United States, and that U.S. automakers are hit with a 35 percent tariff in Colombia, compared with 2 percent for any vehicles coming from Colombia.
The administration says the trade deal with South Korea could increase exports by $10 billion, enough to eliminate the current $10 billion surplus Seoul has with the United States. It would make 95 percent of American consumer and industrial goods duty free within five years.
That agreement, the White House said in a statement, will give American businesses, farmers, workers, ranchers, manufacturers, investors and service providers “unprecedented access to Korea’s nearly $1 trillion economy.”
Supporters say that the Colombia deal, in addition to opening up markets that have been restricted because of high tariffs, would provide a gesture of political support for President Juan Manual Santos, a strong U.S. ally.
Republicans welcomed the prospect of increased exports but said those benefits could have come sooner if Obama had acted more quickly. They said American businesses have paid $3.8 billion in tariffs to Colombia since the trade agreement was signed, and that Americans are losing markets in South Korea because of a Korea-European Union free trade agreement that went into effect in July.
“There’s no reason we should have had to wait nearly three years for this president to send them up to Congress for a vote, but they’re a good start nonetheless,” Senate Republican leader Mitch McConnell of Kentucky said.
Sen. Orrin Hatch of Utah, top Republican on the Senate Finance Committee, said there had been “nothing but passive indifference” from the Obama administration.
Finalizing the three deals has been difficult: Democratic majorities in the last year of the Bush administration opposed them and Obama demanded renegotiation of certain sections of each deal.
In the past year the administration has succeeded in winning concessions from South Korea to open up its markets further to U.S. vehicles and concluded an agreement to bring transparency to banking practices in Panama, known as a tax haven.
It has prodded Colombia into putting together a plan designed to protect labor rights and crack down on violence against labor leaders.
The congressional votes come a little more than a week after Obama submitted the agreements to Congress. The quick turnaround reflects the importance with which House GOP leaders regard them as economic aids.
The goal was to finish the voting by Wednesday, a day before South Korean President Lee Myung-bak is scheduled to address a joint meeting of Congress.
The United States has free trade relations with 17 nations. The last free trade agreement was completed in 2007 with Peru. It could still take several months to work out the final formalities before the current agreements go into force. The South Korean parliament is expected to sign off on its agreement this month.
Guest Post – Fred Carach – Getting Rich on the House?? Game Over
Editor’s Note: Another Must-Read Guest Contribution..
Much has been heard in the press lately about the end of the great American dream of homeownership but what the press has missed is that what has really died in the crash is a perversion of the American dream. The perversion of getting rich exclusively through homeownership. That perversion really started in the 1970s and died in the great real estate crash that began in 2007.
Prior to the 1970s homeownership was regarded as a key asset in the accumulation of wealth but it was never considered the only asset. Real estate values rose too slowly to accomplish that mission. In fact it is surprising how little real estate values have risen over the long term. According to the economist Robert J. Shiller, the recognized economic expert on this matter from 1890 when accurate records began to the crash year of 2007 residential real estate rose only 3.44% a year. Far less than most people would assume. Then the rise in inflation rates changed everything.
In the decade of the 1970s inflation turbocharged real estate and values rose a blistering 8.12% a year, the greatest rise in history and in the 1980s values rose an additional handsome 5.86% a year. These two decades convinced millions of American homeowners that they could now get rich solely through homeownership.
Their home they were now convinced was the truth, the light and the way to getting rich.
People adore owning real estate. They lust for the stability and permanence of the land. They can roll around in the stuff and as the saying goes they are not making any more of it. What’s more everyone knows or rather knew that you can’t lose money in real estate. People have always had an exaggerated notion of how profitable an investment real estate has historically been. This opinion is based to a great extent on the enormous leverage that is common in homeownership. If your down payment is 5% you are employing leverage of 20:1. Wall street speculators would kill for this kind of leverage.
But there was more to it than that. By the 1970s the American people had changed. They were for the most part no longer willing to make the sacrifices that their parents and grandparents had made.
Scrimping and saving and living below your means was too tough for them. Instant self-gratification was in. What was attractive to them was blowing every dime they had on a big-beautiful home and get rich while they were wallowing in their big-beautiful home like a pig wallows in slop. Saving and sacrificing was for dummies. As for the stock market it was way, way to risky. They were far too smart for that crazy gamble. Risk taking was for dummies. Their home was the perfect investment it required zero risk and zero sacrifice. Which was just what they were looking for.
An interesting component of this belief was an amazing lack of interest in any real estate other than their home. When there was enough equity in their home to support an investment in any real estate other than their home for the most part they turned it down flat. After all any investment outside their home would require a sacrifice on their part. We couldn’t have that happening now could we? Instant self-gratification always comes first. The smart career move from their point of view was to shoot for the Mcmansion. Boy could they pig wallow in that baby.
In 2007 their big-beautiful homes imploded on their heads. It is hard to overstate the financial devastation that the housing crash has had on the American middle class. The unemployment rate that everyone is whining about is almost a side show. For millions of middle class, home owning Americans their home was their only financial asset. In a matter of months millions of home owning Americans went “upside down.” They went from having $100,000 to $250,000 or more in equity in their homes and often much more. To being that much or more underwater.
For those who have twenty years or more before they retire recovery is possible but for the millions who are approaching retirement there is very little hope. The statistics are so grim that many of them are hard to believe. According to the famous Case-Shiller Housing Index home values hit rock bottom in the depression year of 1933 with a decline of -30.5% from the 1920s peak boom period. As hard as it is to believe according to the latest Case-Shiller findings we have just broken that record in the 2nd quarter of 2011 with a decline of -32.7% from the 2006 market peak.
About one-third of all the homes in America are paid off and have no mortgage. The remaining two-thirds of all homes have mortgages. An amazing 25% of homes with mortgages are underwater. The outstanding mortgages exceed the value of these homes.
Then there is the seldom reported vacant housing crisis. There are 126 million housing units in this country or about one housing unit for every 2.38 Americans. That is an awful lot of housing for each American. The classic 3/2 American home is overkill if there is only 2.38 people rattling around in it.
The census figures tell the tale. When I first read these numbers they were so bad that I could not believe that they were true. The 1990 census reported that there were a staggering 10.3 million vacant homes in this country. It gets worse, in the 2000 census that figure had risen to 15 million vacant homes and in the 2010 census that figure had risen to 19 million vacant homes. About 15% of all the housing stock in America is vacant. You could level 19 million homes and there would still be housing for every American. This is not good! What were we thinking? We were thinking that you can’t lose money in real estate. Every new home is money in the bank.
The chickens have come home to roost. There will be no quick recovery. We are not only broke but we have a mountain of inventory hanging over our heads. It will take us years to work our way out of this mess.
Announced Job Cuts Up 212% from Year Ago
Editor’s Note: Yet the BLS will come out tomorrow and maintain there is still job creation going on.
U.S. employers announced the most job cuts in more than two years in September, led by planned reductions at Bank of America Corp. (BAC) and in the military.
Announced firings jumped 212 percent, the largest increase since January 2009, to 115,730 last month from 37,151 in September 2010, according to Chicago-based Challenger, Gray & Christmas Inc. Cuts in government employment, led by the Army’s five-year troop reduction plan, and at Bank of America accounted for almost 70 percent of the announcements.
While the bulk of firings are not “directly related” to economic weakness, they “could definitely be a sign of more cuts to come,” John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. “Bank of America is not the only bank still struggling in the wake of the housing collapse, and the military cutbacks are probably just the tip of the iceberg when it comes to federal spending cuts.”
More reductions will add to the pool of job seekers competing for work as policy makers, including President Barack Obama and Federal Reserve officials, strive to spur the labor market. Payrolls probably didn’t rise fast enough last month to lower the jobless rate, according to a Bloomberg News survey of economists before the Labor Department’s monthly jobs figures in two days.
Compared with August, job-cut announcements climbed 126 percent, the Challenger report showed. Because the figures aren’t adjusted for seasonal effects, economists prefer to focus on year-over-year changes rather than monthly numbers.
Government agencies announced 54,182 reductions in September. Of those, 50,000 resulted from the troop reductions announced by the Army, Challenger said.
Financial Companies
Financial companies announced 31,167 cuts, the second most layoffs. Bank of America, the biggest U.S. lender by assets, said on Sept. 12 it will eliminate 30,000 jobs in the next few years as part of Chief Executive Officer Brian T. Moynihan’s plan to bolster profit. The reductions, equal to about 10 percent of the staff, are part of an overhaul that aims to remove about $5 billion in annual costs by the end of 2013.
Today’s report also showed that employers announced plans in September to hire 76,551 workers, up from 15,201 the prior month, while down from 123,076 in the same month last year. Retailers led the gains, planning to add 70,912 positions ahead of holiday.
September Employment
Employers probably added 60,000 jobs in September as the unemployment rate held at 9.1 percent, according to the median forecast in a Bloomberg News survey of economists ahead of the Oct. 7 Labor Department figures.
The Fed ‘will continue to closely monitor economic developments and is prepared to take further action as appropriate to promote a stronger economic recovery in a context of price stability,” the central bank’s Chairman Ben S. Bernanke said yesterday in testimony to Congress.
“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” he said.
Challenger’s data do not always correlate with figures on payrolls or first-time jobless claims as reported by the government. Many job cuts are carried out through attrition or early retirement. Some employees whose jobs are eliminated find work elsewhere in their companies and many announced staff reductions never take place because business improves. The totals also include foreign affiliates.
EZ Crisis Solved – Again?
Editor’s Note: Even Reuters comments on the ‘script’ being followed in the European screenplay. The old mentality is firmly in place. Don’t fix problems – bail them out. Which guarantees that they’ll be back again before too long. What you need to understand is that the bailout can never be big enough in practical terms. The whole thing is a giant paradox.
BERLIN (Reuters) – Following a now-familiar script, Europe again averted disaster in its debt crisis when German deputies rallied behind Chancellor Angela Merkel to approve a stronger euro zone bailout fund on Thursday.
But bigger challenges lie ahead for the euro zone and markets are already demanding more far-reaching measures to prevent a crisis that began in Greece from spreading far beyond Europe and its banks.
The Bundestag (lower house) overwhelmingly approved new powers for the 440-billion-euro EFSF fund to make precautionary loans, help recapitalize banks and buy distressed countries’ bonds in the secondary market.
Despite a rebellion by 15 backbench Euroskeptics, Merkel won 315 votes from her own conservative-liberal coalition, enough to avoid the humiliation of having to rely on opposition Social Democrats and Greens to pass the plan.
“The result of the vote is a strong signal for Europe. The broad majority in parliament clearly shows that Germany is committed to the euro and to protecting our currency,” said Hermann Groehe, general secretary of her Christian Democratic party.
The measure was part of a July 21 agreement by euro zone leaders meant to solve the crisis by providing a second bailout for debt-stricken Greece, partly funded by private sector bondholders, and providing more firepower to prevent contagion engulfing bigger EU economies Spain and Italy.
But that deal failed to stop Italian and Spanish borrowing costs soaring, forcing the European Central Bank to intervene in August to buy their bonds, and may yet unravel in Greece, which has fallen behind again on its deficit reduction targets, pushing it closer to default.
“There is a growing realization, even among the more reticent, that the July 21 package is yesterday’s war, and we need to go further,” a senior EU official said, speaking on condition of anonymity.
The euro and European shares ticked up and safe-haven German bonds fell after the closely-watched vote in Europe’s pivotal power, where public opposition to further bailouts is rife.
But analysts said financial markets and outside powers still want a more comprehensive response from European Union policymakers to the debt crisis.
U.S. President Barack Obama kept up a barrage of criticism of the EU’s crisis management, saying on Wednesday: “In Europe, we haven’t seen them deal with their financial system and banking system as effectively as they need to.”
EU officials are already working on ways of leveraging up the rescue fund, but kept those legally and politically fraught ideas under wraps ahead of the German vote to avoid antagonizing waverers in the Bundestag.
The European Commission welcomed German approval of the EFSF boost and said it was confident the ratification process would be complete throughout the 17-nation currency area by mid-October.
Elsewhere in Europe, there was a sense of relief. French Finance Minister Francois Baroin said the Bundestag vote “confirms German determination to preserve the financial stability of the euro zone.”
So far 11 states have backed the new powers. Of the rest, only Slovakia’s endorsement appears politically difficult.
PAIN IN SPAIN, ITALY
Despite the German vote, developments in Spain and Italy highlighted the stark challenges still facing the euro zone in coping with the sovereign debt crisis.
Spain’s ruling Socialists abruptly shelved plans to boost public coffers by selling part of the state lottery for up to 9 billion euros ($12 billion), in the face of tough market conditions, political opposition and banks’ funding concerns.
The backtracking, a day before bookbuilding was supposed to begin on the public offering of 30 percent of Loterias, was a blow a few weeks before a November 20 election, which opinion polls show the center-right People’s Party sweeping.
Banks involved in the sale, Santander and BBVA, saw the Loterias flotation as a direct rival to their efforts to bolster their capital by enticing Spaniards to withdraw deposits to invest in lottery shares.
Italy meanwhile had to pay the highest yield on a 10-year bond since the introduction of the euro in 1999 at an auction on Thursday, the first long-term sale since Standard & Poor’s cut the country’s sovereign credit rating.
Rome’s funding costs remain under pressure despite ECB bond-buying and a pick-up in risk appetite due to expectations of a stronger euro zone rescue fund. Analysts say the government’s tentative crisis response has harmed investor confidence.
Italy sold 7.86 billion euros of long-term bonds, moving closer to an overall issuance target of 430 billion euros for the year, but the 10-year yield rose to 5.86 percent at the auction, up from 5.22 percent a month ago.
“That’s eye-watering yield levels,” said David Schnautz, a rate strategist at Commerzbank.
Senior officials of the troika of European Commission, ECB and International Monetary Fund resumed talks in Athens aimed at checking that Greece has met the terms of its international bailout program after adopting new austerity measures.
The government will run out of money to pay salaries and pensions in October unless it receives the next 8 billion euro installment of emergency loans. It pushed an unpopular new property tax through parliament this week despite public anger.
Anti-austerity protesters blocked the entrances to several ministries before the start of the talks.
Around 200 finance ministry employees gathered in front of their ministry, shouting: “Take your bailout and leave.”
“The occupations are carried out today when the troika returns to our country and as we face new barbaric measures which were decided and are being decided for further wage reductions … new tax hikes and mass layoffs,” public sector ADEDY said in a statement.
Markets Soar on New Crisis Pledge
Editor’s Note: Haven’t we heard this at least a hundred time in nearly verbatim fashion? They don’t even have to write the stories anymore; just recycle the old ones and fill in the new prices.
(AP:NEW YORK) Treasury prices fell Monday after a pledge from European finance ministers to support that region’s weak economies calmed markets around the globe.
The price of the benchmark 10-year Treasury note fell 65.6 cents for every $100 invested. The yield on the note rose to 1.90 percent from 1.84 percent late Friday. Bond yields rise when their prices fall.
European officials pledged over the weekend to take bolder steps to fight Europe’s debt problems, which threaten to slow the global economy. Last week, indecision by European officials helped send the Dow Jones industrial average down 6 percent.
Jittery investors loaded up on U.S. government bonds, sending yields sharply lower. The yield on the 10-year note touched a record low of 1.71 percent last week.
The yield on the 30-year bond Monday rose to 2.99 percent from 2.90 percent late Friday. Its price fell $2.
The yield on the two-year Treasury rose to 0.23 from 0.22 percent. The three-month T-bill paid a yield of 0.04 percent, up from 0.01 percent Friday. Its discount wasn’t available.
Another CME Margin Hike
Editor’s Note – Take notice to the obvious propaganda at the end of the piece. The dollar is now the safe haven for investors. Gold is junk. The complete separation of the paper and physical metals markets is close at hand. The Fed’s job of covering up its inflationary activities is a total and acute failure. In the meantime, thank the CME for allowing you to get more ounces for your crashing paper currency.
NEW YORK (TheStreet) — The CME Group(CME_), operator of the Chicago Mercantile Exchange, announced late Friday it’s increasing the margin requirements to trade gold, silver and copper.
CME said the initial requirement to trade 100-ounce gold futures is rising more than 21% to $11,475 from $9,450, while the maintenance margin is being boosted nearly 18% to $8,500 from $7,000. The changes are effective after Monday’s closing bell.
For the 5000-ounce silver futures, the initial requirement is being lifted by 15.6% to $24,975 from $21,600, and the maintenance margin will rise an identical percentage to $18,500 from $16,000.
Copper futures are getting similar treatment with the initial requirement going to $6,750 from $5,738, and the maintenance margin lifted to $5,000 from $4,250.
The CME last lifted requirement for trading gold futures in late August. Gold prices plunged on Friday on the recent strength in the U.S. dollar, which for now seems like the safe haven of choice for investors.
TWIST & Shout – Andy Sutton
The mainstream media is abuzz this morning, Wednesday September 21st, about the federal reserve, who is once again plotting to save the USEconomy from certain disaster. Really, haven’t we heard this many times before? If it was that easy, shouldn’t it have been done a few years ago when all the problems started? If that is the case, we’ve got little more than a bunch of incompetent bankers on our hands. That is bad enough. However, I think most people are starting to understand that it is much worse a problem than just plain vanilla incompetence. It is about collusion and corruption and I am being very generous in that assessment.
The Latest Ploy
The fed is expected to announce this week that it is going to reach back 50 years into its bag of tricks and pull out some manipulations that will save us. This latest cockamamie scheme is to shift its $1.7 Trillion in short term USBond holdings (monetized debt) to longer-term holdings in an effort to drive down the long end of the yield curve even further. Apparently, the current monetization efforts haven’t been good enough. They have been driving the long end down for three years now, either directly through direct rate intervention or by subsidies aimed at the end products resulting from those rates such as mortgages.
The obvious rationale is that driving down rates on debt will rescue the economy, since people will be able to take on even more debt to spend more money on more imported trinkets from China and elsewhere. Again, haven’t we heard this before? We still haven’t really felt the full impact from the last raft of malfeasance when the fed went on an overt $600 Billion bond-buying spree. For those who haven’t yet connected the dots, that is called monetization of debt. A very inflationary measure. The dollar has paid the price. Don’t be fooled by the ridiculous assertions that the dollar is ‘stronger’ because the dollar index has gone up. The only reason that has happened at all is because Europe is on the brink of total collapse and disintegration. There is no way anyone can conduct a sane examination of the dollar’s fundamentals and conclude there is anything that represents ‘strength’ at this point. At best it is status quo and the capitalization of another’s even more dire circumstances.
On the surface, all this might look very appealing. Lower interest rates across the board. Sure, there will be another wave of refinancing of mortgages. If you can qualify. If you’re not underwater. Maybe. The subsidies aimed at the housing market so far have been an absolute and total failure. That dog won’t hunt anymore. Game over for real estate for at least a decade. So as usual, we’re left to ask Cui bono? Who benefits. Well the bankers of course. The fed dropped short-term rates into the basement in 2008 and has held the hammer down. This punished savers around the country. All those baby boomers who are retired/retiring (maybe) are going to need income from their meager savings to make up for the rising prices that have resulted from the fed’s malfeasance and lack of stewardship of the dollar. They won’t get much in the way of income from traditional low-risk investment vehicles, that is for sure. The proverbial ‘riskless’ asset pays nothing after taxes. Nothing. And it isn’t riskless. Put it another way – would you be willing to give the USGovt a loan for 90 days? 180? 10 years? How about 30 years? At maybe 2.5% per annum? That is a foolish proposition on even the best of days. The savers get creamed again. Bernanke is so worried about the economy, but yet he’ll purposefully and deliberately undertake policies that will gut the one component of the economy that is capable of spurring growth – savers. And this is not the first time either. And he is not the first guy to do it. This has been a pattern for quite a long time now.
The All-Important Question – Cui Bono?
So who benefits again? The banks, obviously. The lower the yield curve, the higher the spread, the higher the profit margin. All actions done so far have been to protect and enrich the banks and their precious financial system – all at the expense of the economy and all done intentionally, in my opinion, with malice and aforethought. Just think back to TARP, TALF, TSLF, and the other multi-trillion dollar rescue packages. Think about the $500 billion (minimum) in swaps done between the fed and the ECB in 2008-09 that Bernanke was grilled on and claimed not to know the recipients thereof. Think about the latest harebrained stunt aimed at saving European banks. More unlimited dollar bailouts for foreign banks. More protection of the financial oligarchy. More inflation. Less purchasing power for the dollar. More pain for consumers. Less economic growth.
At the bottom of this issue is that the Keynesian way is still in full force, which guarantees that things will not get any better. Two of the biggest pillars of the Keynesian way are to punish savers because saving is a bad activity – all monies should be spent on consumption to maximize current ‘growth’. Never mind future growth; all actions are to be geared towards the short run. The second big pillar is deficit spending and debt accumulation at all levels of the economy. Again, forget about the long-term consequences. All focus is dedicated to the short run. That is the Keynesian way in a nutshell.
The Consequences
We’re already seeing firsthand the catastrophic failure of that policy pathway in Europe. It is an unmitigated disaster. We’ll reap the full whirlwind here in America before too long. Instead of focusing on debt reduction across the board, the central planners, our new economic politburo, are undertaking policies that will accelerate debt accumulation at all levels. Consumers are back on the credit card big time as unemployment remains high and people are forced to continue borrowing to make ends meet. They were in over their heads to begin with and now for many, there is no way out. The house is underwater. The job is gone. The unemployment check isn’t enough and it is going to run out soon anyway. These people end up running full speed to the bankers who are more than willing to accommodate with rates of usury that would make the mafia blush.
The ‘cuts’ that are forthcoming from our new unconstitutional ‘super congress’ will almost certainly be from social programs, not the sacred cows such as the Pentagon budget, bank bailout monies, or subsidies paid for keeping jobs out of America. The lobbyists have already guaranteed that. I’ll say it again – the American people are the only ones who don’t have someone lobbying for them to the members of that ill-conceived and very illegal group. It is terribly ironic that the one group who is going to bear the full burden of all of this does not even have one representative in the process. We know what Jefferson said about that. If we don’t, then shame on us for not knowing our history.
The bottom line is that our debt is already unpayable. Our bonds are junk. Our country is several orders of magnitude deeper into this mess than Greece. According to Laurence Kotlikoff, the net present value of our obligations relative to GDP is 14 times greater. Greece’s multiple is only 12. Yet we had people surprised when our debt rating was cut by one single notch. It was an affront to our perception of American superiority. That is gone, people. We’ve allowed it to be squandered – all for the satisfaction of short-run desires and an economic philosophy that was brought into the world in the worst possible manner: half improvised, half compromised. The policymakers of the day provided the compromise; Keynes was more than happy to provide the rest. In a way, he got off easy; his demise came long before that of a world that decided to throw away prudence in pursuit of his unattainable utopia.
Credit Stresses at Pre-Lehman Levels (AGAIN)
Editor’s Note: They certainly aren’t having much luck putting Humpty Dumpty together again over there in Europe. Our best educated guess says they won’t have much better luck here either.
Key indicators of credit stress have reached the danger levels seen before the Lehman Brothers failure three years ago, with Markit’s iTraxx Crossover index – or “fear gauge” – of corporate bonds surging 56 basis points to 857 on Thursday.
Societe Generale led a further rout of bank shares, crashing 9pc in Paris on concern that it might need recapitalisation to cope with losses on Italian and Spanish debt.
The yield spread between Italian 10-year bonds and Bunds reached a fresh record of 408 basis points before the European Central Bank (ECB) intervened in late trading. It is near the level at which LCH.Clearnet raises margin requirements, the trigger that forced Greece, Portugal and Ireland to request bail-outs.
Global investors appear shaken by the refusal of the US Federal Reserve to come to the rescue yet again with quantitative easing (QE3) even though it was never likely the bank would launch fresh stimulus with core inflation running near 2pc or in the face of protests from Capitol Hill.
The global flight from risk has hit Europe hardest. Peter Possing Andersen from Danske Bank said Europe’s authorities are running out of time. “The financial markets have lost faith in the current policies and the economy is on the verge of a recession. Radical action is needed to short-circuit the negative spiral,” he said.
“Segments of the financial markets are dysfunctional and access to credit is being shut down. European policymakers must take imminent and bold measures. Until this happens, the market will grind slowly but surely towards disaster. The current policy of austerity risks killing the already-fragile recovery and is making a bad situation worse in terms of debt dynamics,” he said.
Mr Andersen said Greece needs greater debt relief to break the “vicious circle”, while the ECB should step in with “unlimited” bond purchases from countries such as Italy that are essentially solvent.
Andrew Roberts, credit chief at RBS, said recent weeks’ grim economic data have rendered Europe’s “muddle through” policy unworkable, pushing weaker states towards the brink. The latest PMI data show that export orders for manufacturing tumbled to 44.8 in September, the lowest since mid-2009.
Ominously, the PMI data for China is flashing contraction warnings for the third month, dropping further than it did during the depths of the Great Contraction, suggesting the loan curbs are starting to bite.
“We are in a fresh cyclical downturn within a structural slump/depression. We need global co-ordinated monetary action and the ECB must cut rates by 50 points. It made a terrible mistake by raising rates in July,” Mr Roberts said.
The IMF has slashed its growth forecast for Italy to a stall speed of just 0.3pc in 2012, a level that risks havoc with debt dynamics. The country must raise €260bn by late next year. Each 100-point rise in borrowing costs increases the budget deficit by €2.5bn.
The IMF warned that emerging markets are nearing the buffers of credit growth and are losing their fiscal room for manoeuvre. It said China’s domestic loans have risen to 173pc of GDP, “well above” the safety level.
The IMF fears “significant” losses on $1.7 trillion of local government debt, raising the risk Beijing may need to rescue the system. “The consequences could be a substantial worsening of China’s public debt metrics and a narrower scope for future fiscal stimulus,” it said. China cannot safely respond to a second global shock by opening the floodgates of cheap credit again.
Professor Giuseppe Ragusa from Luiss Guido University in Rome said the ECB has the power to halt the eurozone’s escalating crisis by pledging to buy up €2 trillion of bonds. “They would not have to buy the debt. The promise would be enough,” he said.
Such bold action appears unlikely. The ECB has intervened hesitantly over the past six weeks, without the overwhelming force needed to convince markets that it will back-stop Italy’s €1.8 trillion debt – the world’s third largest.
The bank is constrained since the policy is vehemently opposed by the Bundesbank and by German president Christian Wulff, who has accused the ECB of breaching the EU treaty law.
David Owen from Jefferies Fixed Income said the Bundesbank increased its balance sheet by €50bn in August alone to help shore up the Eurosystem. It has lifted its liquidity provision eightfold to €421bn since the crisis began, almost as much as the ECB itself.
On Thursday IMF managing director Christine Lagarde said the ECB must continue to provide “solid, reliable” funding for euro-area banks and economies as parliaments in the region pass measures into law to fight the region’s debt crisis.
The ECB “plays and can play and I hope will continue to play a critical role,” she said.
There are clearly limits to how far this policy can be pushed without a treaty change. Otherwise it amounts to fiscal union by the back door. The task of purchasing bonds and recapitalising banks must fall to the EU’s bail-out fund, but it will not be ready until ratified by all national parliaments later this year. Europe faces a tense Autumn.